Saturday, August 08, 2009
7:35:39 PM EDT

The Bulls maintain control

by
Leigh Stevens

There's little doubt in my mind that this market is going still higher in the longer term view. The question is when the inevitable correction will set in ahead that will jolt the Bulls. My sentiment indicator has gone off the charts so to speak in terms of typical bullish 'extremes'. So, per my last week's commentary I've been suggesting taking some (e.g., half) profits on calls.

I would also note that my mention at looking at the August 885 S&P 500 (SPX) puts was not well considered, given my long-standing aversion to buying cheaper, but more risky, options so far out of the money. I didn't buy any puts, although I was tempted in NDX, which is starting to lose some of it's prior upside momentum.

You can see lose of momentum graphically when prices start falling away from previous up trendlines, which is a dandy way to show that the rate of upside change of the first up leg isn't been equaled. As prices start falling under that line rather than rising along, but under, such a trendline it suggests buyers pulling back some. See the Nasdaq charts for this visual.

On a longer-term investment basis, the most recent weekly closes in the Dow Industrials (INDU) and Dow Transports (TRAN) 'confirmed' each other in new highs for the current move. Both TRAN and INDU exceeded their early-January weekly closing highs. By my interpretation this is a Dow Theory 'buy signal', although there could be different takes on that. Dow looked for the Averages to 'confirm' each other by both exceeding prior highs or lows on a longer-term closing chart basis. I'll show that chart in this section.

Speaking to the question of how near a short-term correction might be, besides the 'overbought' daily readings in the RSI and HIGH bullish 'sentiment', the hourly Nasdaq charts are looking toppy and show possible Head & Shoulder (top) formations. This doesn't mean I'm anticipating a major pullback. For example I'd be very surprised to see SPX back below 950, the Dow below 8850 or the Nasdaq Composite below 1880, at least not for more than a day. Stay tuned on that!

CHART OF THE WEEK:

In case you don't follow the two Dow Averages in tandem, it's a good idea to look at them from time to time. The two together can provide some meaningful clues as to how the economy is doing.

If inventories are very low the way they are supposed to be currently, INDU will pull ahead if manufacturers start increasing production. Changes like that are picked up by the market.

If Transportation stocks don't also start to rise, it suggests that those companies are not picking up their rate of shipments. Inventory replacement without shipping the goods out the door is not the underpinnings of a sustained recovery.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

The S&P remains bullish in its pattern and CONTINUES to rise alone an extension of its previously 'broken' up trendline. Such a line provides a useful visual and instant check on whether the index or stock in question is at least matching its prior rate of upside price momentum. The thing with such 'resistance' indications is that it tells you nothing about the level or area where a correction might start FROM. It's not like the 'signal' sometimes provided by a prior high, or a 'line' of prior lows, for example.

The other thing to say about SPX prices is that the upside 'minimum' suggested objective I had, a type of measured move target, has now nearly been met as noted on the daily SPX chart below. Given the overbought RSI, and which is no longer 'confirming' prices in their new relative highs, AND the very high bullish sentiment seen this past week, this market is a correction waiting to happen. It's at least important to know when to stop buying dips, even if the chart patterns don't also scream out to play the short side.

Near support is in the 950 to 965 area currently.

Near "resistance", in quotes, is at 1022. Fairly major resistance doesn't come in until 1100.

TRADER SENTIMENT:

Traders are going overboard in buying calls as seen by the recent upward spikes in my sentiment indicator above.

NOTE: The way I keep my equity call to put daily volume ratio is to divide daily CBOE call volume BY put volume and plot it that way, so that a HIGH number (e.g., 2.00 or above) equals a type of 'overbought' situation similar to overbought/oversold indicators like the RSI.

If the PUT/Call ratio you see around is at .5 or less, this is an equivalent reading. We're looking for high bullish 'extremes' as being where daily call volume is double (2 times, or more) that of puts. OR, where daily put volume is HALF (or less) that of call volume; i.e., Put/Call is .5 or less. Same thing, but different divisions.

I also noted with interest one major national newspaper, representative as far as not being overly focused on the stock market, suggesting in an article that investors are weighing whether it is 'too late' to buy tech stocks since they've had such a sizable move already. Maybe this represents a long-term 'buy signal' in tech!

S&P 100 (OEX) INDEX; DAILY CHART

The S&P 100 (OEX) Index chart remains bullish but has also now met my near to intermediate-term objective of 471. This target takes the prior trading range of 30 points (441-411) and adds this to the 'breakout' point at 441 to equal 471; Friday's OEX high was 472. A little profit taking set in once the Index shot above 470.

I've noted near resistance now at 476, although it's tough to estimate 'resistance' when going to new highs for a move. Longer term resistance doesn't come in to play until 490-500, especially around 500.

Near support is in the 450 to 440 price zone.

As with all the other indexes, OEX is at an overbought extreme in terms of the 13-day RSI and the latest higher high is 'unconfirmed' by a similar new high in the Relative Strength Indicator, which can represent a bearish/RSI divergence.

DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow 30 (INDU) has also been surging higher in recent weeks, finally equaling the strength seen in the broad S&P averages that are capitalization weighted.

INDU resistance looks like 9440, extending up to 9500. A close above 9500 that was maintained in subsequent days would suggest this current strong move was getting even stronger.

Conversely, a close below near support at 9200, that lasted more than a day, would suggest that a bearish near-term break of current strong momentum. Next and key support is in the 9000 area. A close below 8850 is not expected as that level, if reached, should bring in substantial buying interest.

NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

The Nasdaq Composite (COMP), while still bullish in its pattern, is showing selling in the 2000 area as COMP has been drifting sideways and seemingly (so far) unable to make sustained headway above this level. The effect so far, especially apparent on the hourly chart (not shown), is action that looks toppy. This may just the effect of shifts in buying interest to the less pricey S&P stocks.

The 5-day average in my sentiment indicator is as high as I've seen it since this move began back in March. A correction is 'overdue' as I noted in my initial comments.

On the other hand, another or a second consecutive weekly close above 2000, will provide further bullish indications that the current rally remains strong. I am bullish on the Nasdaq stocks on a long term basis, but am also a trader who looks at the odds for a correction which is rather high.

Key resistance is at 2000, with next major resistance at 2075, extending to 2130.

Near support is at 1970, then around 1925, with fairly major support in the 1880 area.

NASDAQ 100 (NDX) DAILY CHART:

The Nasdaq 100 (NDX) chart is bullish in its pattern but is also starting to lose some of its upside momentum. This may or may not mark the start of a correction. I would say the odds are that it is, especially factoring in the high RSI and bullish extreme in trader sentiment which I've talked about today. I noted also the hourly chart picture which has a rounding top kind of formation.

I don't want to OVERemphasize the risk of a correction but it is there. If NDX started falling below 1600, then 1580, this would suggest possible further weakness. I've noted anticipated support on the daily chart at the 21-day average, currently at 1563 and what I think is fairly major support at 1515 (to 1500). A daily close below 1500 is not expected but if seen, could lead to a further drop to the 1450 area which is my current 'worst case' scenario.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

The Nasdaq 100 tracking stock (QQQQ) hasn't been able to get above what had been my long-standing $40 objective for the Q's. I've been saying for some time that a further sustained move above 40 would be surprising, without a correction setting in to cause a needed pause here. A strong bull market has dips along the way. Ones that don't can tend to have panic drops later.

Volume trends also continue to suggest that there is limited buying now that the stock has hit 40, but if QQQQ moves above 40, could go to 41-41.3. I wouldn't rule it out but see it as unlikely, or unsustainable, without a confirming volume surge on a move above 40.

Near QQQQ resistance: 40.0

Next overhead resistance: 40.5-40.8

Near QQQQ support: 39.25

Next support: 38.8-38.4

First area of major support: 37.2-37.0

RUSSELL 2000 (RUT) DAILY CHART:

Interestingly, the Russell 2000 (RUT) has been the first of the major indexes to get back up into its previous uptrend channel and suggests to me that smaller investors are looking for a resurgence of the smaller (cap) is better theme of investing. However, RUT will also start pulling back if the tech heavy Nasdaq starts slipping.

Very near support is at 560 to 545, then at 533-527. 520 is a key support suggested by the 55-day moving average, a moving average 'length' and a fibonacci number that seems to work well as a level below or above which to 'define' whether RUT is in an uptrend or downtrend.

Near resistance is in the 575 area, than at 600.

GOOD TRADING SUCCESS!

NOTES ON MY TRADING GUIDELINES AND SUGGESTIONS

CHART MARKINGS:

1. Technical support or areas of likely buying interest and highlighted with green up arrows.

2. Resistance or areas of likely selling interest and notated by the use of red down arrows.

I WRITE ABOUT:

3. Index price areas where I have a bullish bias or interest in buying index calls, selling puts or other bullish strategies.

5. Bullish or Bearish trader sentiment and display the graph of a CBOE daily call to put volume ratio for equities only (CPRATIO) with the S&P 100 (OEX) chart. However, this indicator pertains to the market as a whole, not just OEX. I divide calls BY puts rather than the reverse (i.e., the put/call ratio). In my indicator a LOW reading is bullish and a HIGH reading bearish, consistent with other overbought/oversold indicators.

Trading suggestions are based on Index levels, not a specific option (month and strike price) and entry price for that option. My outlook often focuses on the intermediate-term trend (next few weeks) rather than the next several days of the short-term trend.

Having at least 3-4 weeks to expiration tends to be my guideline for trade entry choice. I attempt to pick only what I consider to be 'high-potential' trades; e.g., a defined risk point would equal in points only 1/3 or less of the index price target.

I tend to favor At The Money (ATM), In The Money (ITM) or only slightly Out of The Money (OTM) strike prices so that premium levels are not as cheap as would otherwise be the case, which helps in not overtrading an account. Exit or stop points, as well as projected profitable index price targets, are based on my technical analysis of the underlying indexes.